Monday, April 15, 2024

Devaluation of Rupee against the Dollar

Written By Darshan M (Grade 10)


When India got its independence in 1947, the pound was the world’s most important currency and it took 13.37 Indian rupees to make each pound, at that time an agreement between the UK and US pegged the pound–to–dollar rate at $4.03. So at that time, the value of the rupee against the dollar was 3.32 rupees. 

Trade done in India was entirely conducted in pounds at that time, so India did not need dollars. By the time India became a Republic and the constitution came into existence in 1950, The UK itself was fighting World War II and also suffered debts. In 1949, the pound got devalued by 30% and 1 pound was $2.80, this led India to peg the rate as 4.75 rupees to a dollar and this stayed until 1965. 

At this point, India began to need the dollar because the US had overtaken the pound as the preferred currency. The 1960s was particularly a tough time for the Indian economy, it fought two wars one, unsuccessfully against China and a successful one against Pakistan, this was followed by a bad harvest and a drought that forced India to import wheat from the US. 

India needed more dollars than expected, as a result, it kept devaluing its currency over the years. This was a situation where recovery was difficult and we could have gone the way Sri Lanka is facing a financial crisis. But then Prime Minister Narashima Rao and his Finance Minister, Manmohan Singh liberalized the economy in 1991. 

Liberalization also meant that the rupee was left to itself to find its worth in the global market, the rupee that was artificially been pegged earlier for 17.50 rupees before liberalization quickly devalued, losing half of its value within 6 years to 35.43 to a dollar in 1996, the rupee might have fallen in value but Indian economy was doing well in terms of development, the age-old Ambassadors were replaced by modern cars and India rose as a software powerhouse. 

By 2019 the rupee again steeply devalued to 70.39 rupees to a dollar but now Indians are still better off, its GDP rose to become the 5th largest in the world, and foreign exchange reserves crossed 300 billion dollars in 2019 which was almost zero pre-liberalization. 

So, we can see that fall of the rupee against the dollar is not a bad thing because India performed very well even though it devalued against the dollar. However, this is a temporary crisis. FPI, FII, Venture Funds, Make in India, and PIL will eventually start coming back at some point, India’s GDP will rise and our foreign exchange reserves will gradually cross 1000 billion dollars even as the currency slowly depreciates to hit 100 rupees a dollar.


Featured Image Courtesy – The Financial Express



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